On July 18, with more than $18 billion in debt, Detroit became the largest U.S. city to file bankruptcy. They filed under Chapter 9 of the U.S. Bankruptcy Code, which is reserved for municipalities such as cities and towns. In order to file for Chapter 9 bankruptcy, Detroit needed to prove to a judge that the state of Michigan gave them the approval to file, show that they are unable to pay bills, and prove that the city “negotiated in good faith with creditors.” The process of filing bankruptcy for this case could take anywhere from months to years depending on whether or not creditors are willing to “agree to concessions ahead of time and the bankruptcy judge decides to expedite the case.”
While waiting out this process, there are a couple of things you may want to know that could impact the individuals of Detroit. Being as there are more than 23, 000 retirees within the city, the topic of pensions has been at large. Although a slight possibility, it is not likely that retirees will lose their pensions; however, they could see a reduction in the amount paid per month. Retirees’ pensions may be protected during this process, but their health care insurance may not be; under Chapter 9, retirees could lose their benefit plans.
Along with side effects that affect individuals, there are outcomes that will affect the city as a whole. If the city so chooses to, they may sell any assets that they own in an attempt to reduce debt; such items could include artwork form the Detroit Institute of Arts. However, they cannot be forced to take this action. Another thing to note is that just because the city is filing for bankruptcy, it doesn’t mean that all of their debt will be erased. Filing for Chapter 9 bankruptcy will only give the city “power to negotiate a debt-reduction deal that could be forced upon bondholders and creditors that previously refused to accept concessions.” This deal will include a plan to help stabilize their finances and get the city back on track. However, this plan cannot be put into action until it is “approved by more than half of the creditors in each creditor class and by creditors representing at least two-thirds of the total claims.” Once this occurs, the city can begin its slow process in reviving its current financial situation.
Nathan Bomey. “What to know: How Detroit bankruptcy could unfold.” Detroit Free Press Business. https://www.freep.com/article/20130613/NEWS01/306130030/Detroit-Chapter-9-bankruptcy-Kevyn-Orr.